In early 2008, Libya’s sovereign-wealth fund controlled by Col. Moammar Gadhafi gave $1.3 billion to Goldman Sachs Group to sink into a currency bet and other complicated trades. The investments lost 98% of their value, internal Goldman documents show.

What happened next may be one of the most peculiar footnotes to the global financial crisis. In an effort to make up for the losses, Goldmanoffered Libya the chance to become one of its biggest shareholders, according to documents and people familiar with the matter.

Negotiations between Goldman and the Libyan Investment Authority stretched on for months during the summer of 2009. Eventually, the talksfell apart, and nothing more was done about the lost money.
(…)

Libya was furious at Goldman over the nearly total loss of the $1.3 billion it invested in nine equity trades and one currency transaction,people involved in the matter say. A confrontation in Tripoli between atop fund executive and two Goldman officials left the bankers so rattledthat they made a panicked phone call to their bosses, these people say.
Goldman arranged for a security guard to protect them before they left Libya the next day, they say.

(…)

But that fall, the credit crisis hit with a vengeance as Lehman Brothers failed and banks all over the world faced financial crises. The $1.3 billion of option investments were hit especially hard.
The underlying securities plunged in value and all of the trades lost money, according to an internal Goldman memo reviewed by the Journal.
The memo said the investments were worth just $25.1 million as of February 2010—a decline of 98%.

My pal, colleague and alter ego, the financial manager Phil DeMuth, culled data from a financial Web site, ABAlert.com (for “asset-backed alert”), that Goldman Sachs was one of the top 10 sellers of C.M.O.’s for the last two and a half years. From the evidence I see, Goldman was doing this for years. It might have sold very roughly $100 billion of the stuff in that period, according to ABAlert. Goldman was doing it on a scale of billions even when Henry M. Paulson Jr., the current Treasury secretary, led the firm.

The Goldman spokesman would not comment on this except to note that other firms sold C.M.O.’s too.

The point to bear in mind, as Mr. Sloan brilliantly makes clear, is that as Goldman was peddling C.M.O.’s, it was also shorting the junk on a titanic scale through index sales — showing, at least to me, how horrible a product it believed it was selling.

The Goldman Sachs spokesman said that the company routinely shorts the securities it underwrites and said that this is disclosed. He noted candidly that Goldman is much more short in this sector than usual.